Extension of trade theory

A. Comparative advantage
 country has comparative advantage only if able produce good at ↓ opportunity cost than
other country

B. PPF (Production Possibilities Frontier 邊境) meaning

 = production possibilities curve
 show 2 goods maximum attainable combination
 economy can produce with given resources& tech.
 separate possible combination from impossible 1

C. PPF construction
 constructing PPF assumption:
1) economy only produce 2 goods
2) fixed amount of production resources
3) constant production tech. lv.
4) all resources used in most efficient way

 straight line:
 assume constant cost of production
 e.g MC& OC constant

 concave to original point:

 assume increasing cost of production

1
D. PPF implication
 combination of goods along PPF
 show 2 goods maximum amount the country can produce with given resources& tech
 there is scarcity

  1 good production   other good production

 choices have to made

 PPF slope
 = OC of producing additional unit of X-axis good in term of Y-axis good
 = MC
 consider absolute value only
  PPF slope (near 0)   producing X-axis good OC
1
 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑌 𝑎𝑥𝑖𝑠 𝑔𝑜𝑜𝑑 𝑂𝐶
𝑠𝑙𝑜𝑝𝑒

E. PPF& efficiency
 production combination outside PPF (pt F)
 unattainable
 cannot produce these 2 good amount  with existing resource& tech

 production combination on PPF (pt C)

 efficient
 no way for country  produce  good without produce  other good

 production inside PPF (pt B)

 inefficient
 must be either resources unemployment/ underemployment

2
F. Shift of PPF
 country can produce  2 goods with all resources
 PPF shift outward
 = better off ∵ consume  goods
 country may  output
 represent potential output 

 cause PPF shift outward

 tech. improvement
  resources

 trade-off between 2 goods production may change over time

 PPF slope change

G. PPF with  MC
 in reality  output production MC often  with output
 PPF concave to origin

 Remark:
cannot determine absolute advantage by comparer 2 countries PPF

3
H. PPF with constant MC& Consumption Possibility Curve
 when trade  country specialize produce good which has comparative advantage
 complete specialization
 after specialization  output allocation depend on TOT
 country trade with other  if TOT line between 2 country OC of producing that good

 before specialization& trade

 under autarky
 production possibilities = consumption possibilities
 production point = consumption point

 after specialization& trade

 international P line = TOT line
 show mutually acceptable 2 goods TOT (=mutually beneficial TOT)
 slope = 2 goods exchange ratio
 用 total good after specialization amount plot
 Remark: exam 要 mark 返 goods 數量

 consumption possibility curve

 = CPF (consumption possibility frontier)
 int’l P line = consumption possibility curve with trade
 trade along int’l P line
 country produce along PPF& consume along int’l P line
  living standard achieved
 consumption combination depend on consumption preference

4
I. PPF with  MC& consumption possibility curve
 country not completely specialize produce 1 good

 MC of produce good < TOT  country produce  that good

 equilibrium of production:
 MC of produce X-axis good = TOT
 international P line tangent 掂住 to PPF

 when country trade along int’l P line

 int’l P line = consumption possibility curve

5
 Remark: find consumption pattern
1) find consumption pt with trade (通常題目比)
2) find production point (= international P line tangent to PPF)
3) good produce < good consume
 difference between produce& consume = import vol.
4) good produce > good consume
 difference between produce& consume = export vol.
5)  export vol. will exchange import vol.
 TOT found

6
J. Globalization features

 globalization:
= process that different country economies become  integrated& independent
  cross-border economic activities
 e.g flow of G&S / direct investment / financial asset / labor

1) emergence of world market:

 trade expansion + trade barrier elimination + info. tec. advancement
 allow G&S market on global basis
  economic integration  emergence of a single world market
 free trade   product choice provide to consumer
 financial asset trading   capital flow for short& long term investment
 info. tech. advancement  ppl manage financial transaction anytime& anywhere

2) int’l division of labor:

 different country specialize produce different product part
 task relocation / production outsourcing in both manufacturing& service sector

3) int’l economic cooperation:

 int’l organization set up
 promote free trade& economic cooperation on int’l/ regional basis

 cross border economic activities

 int’l trade
 foreign direct investment  multinationals rapid growth
 capital flow (=investment)

7
K. Globalization effect

 comparative adv.  free trade basis ; free trade  globalization basis

 free trade + transport& communication& info. tech. improvement
 firm tendency move G&S production from  cost developed country to  cost
developing country

1) better world resource allocation:

 specialization + trade  better world resource allocation
 production move to  cost country   total output

2) production economies of scale:

 specialization + trade  enable  production scale  enjoy economies of scale
 multination relocate production line to  cost country
  production cost + developing country enjoy  economic growth
3) factor P equalization:
  cost country import good from  cost country
 country factor P difference 

4) consumer good  P:
 multinational economics of scale  room for product P 
 developing& developed country ppl purchasing power& living standard 

5) technological development:
 foreign direct investment  bring production tech. to developing country
  production efficiency +  economic growth

8
L. Globalization Pros

1) enjoy economies of scale

2)  job opportunity in low cost country:

 globalization  foreign direct investment   job opportunity +  wage rate

3)  developing country economic growth:

 foreign direct investment  bring capital& tech. to developing country

4) enjoy cheaper consumer good

5)  investment opportunity:
 globalization   investment channel
  capital mobility  enable spread investment risk

6)  less developed country human capital:

 globalization facilitate ppl movement
  developed country ppl  can pursue  education in developed country

M. Globalization Cons

1) unskilled worker unemployment in developed country:

 job outsourced to other country  lost job

2) worker exploitation 剝削 in developing country:

 multinational exploit developing country worker
 e.g low pay / long working hrs

3) developing country pollution:

 developing country  environmental standards& ignore pollution
  production cost
 unfavorable to sustainable development

4) loss independence:
  production specialization  country import good produce at  cost
  reliance on raw material import& final good& necessities
 harmful to country development